Cross-Border Arbitrage And Free Trade

Abstract

The following study presents a theory of cross-border arbitrage by consumers.  Competitive forces should explain how equilibrium prices would be set on each side of a border. Various trading partners have ratified numerous free-trade pacts. There is a need to investigate the success or failure of these agreements.  Because of the many non-tariff trade barriers, it is sometimes difficult to construct meaningful tests of the free-trade issues for products on an individualized basis.  Our comprehensive model of cross-border price variation develops an appropriate test.  A series of hypotheses on geographical arbitrage are presented. We also explain why some products may have larger price differences than others based on price sensitive arbitrage.  Our model may be used to measure the likelihood of undermining influences to free trade from any non-tariff barriers that continue to plague relations between trading partners.